IMF gives green light for $17 bn Ukraine aid package

The International Monetary Fund has approved a two-year $17.1 billion loan package for Ukraine. The immediate disbursement of $3.2 billion will allow Ukraine to avoid a potential debt default.

The IMF’s 24-member board agreed to the two-year program to aid
Ukraine’s troubled economy on Wednesday.

The approval gives the green light for the immediate release of
$3.2 billion to Ukraine, which will allow the nation not to fall
into default, Reuters reports. More than half of that money will
be dedicated to supporting the country's budget.

The package will open up loans from other donors totaling around
$15 billion. The goal is for Ukraine to use the money to
stabilize its economy.

"The authorities' economic program supported by the Fund aims
to restore macroeconomic stability, strengthen economic
governance and transparency, and launch sound and sustainable
economic growth, while protecting the most vulnerable," the
IMF said in a statement.

IMF managing director Christine Lagarde commented on the aid
package, stating that the plan may come with geopolitical and
implementation risks.

"On the implementation front, we are taking all the
precautions we can in order to mitigate those risks,"
Lagarde told reporters on Wednesday. "On the geopolitical
front, clearly the bilateral international support, and the
cooperation of all parties, will be extremely helpful to
reinforce the position of the economy of Ukraine.”

"We believe that Ukraine has an opportunity to seize the
moment, to break away from previous practices, both from the
fiscal, from the monetary, and from the governance point of
view,” Lagarde added.

Ukraine’s crisis was exacerbated after months of anti-government
protests and Crimea’s referendum to join Russia.

The country's economy is forecasted to contract by three percent
due to the chaos and lack of order, according to Ukrainian
authorities. The nation's output dropped 1.1 percent in the first
quarter of 2014.

The ongoing protests, especially in the east of the country, are
not helping the nation get its economy back on track. In fact,
Ukraine’s acting President Aleksandr Turchinov said on Wednesday
that Kiev’s government cannot control the situation in the east of the
country, and called to speed up the creation of regional militias
loyal to Kiev.

Lagarde noted that further sanctions against Russia may harm
Ukraine's economy even further, as its neighboring country is a
key export market for Ukraine.

"Clearly on the front of sanctions, anything that undermines
the economic situation of the country will jeopardize the
implementation of the program, which is why we very strongly
encourage the parties to negotiate, to come to terms,"
Lagarde said.

'Bold program of reforms'

Lagarde argued that Ukraine has already shown its ability to
undertake “comprehensive reforms,” listing a few of the
sacrifices that have been made.

“Whether it was a question of letting the exchange rate
float, whether it was a question of reforming the procurement
law, whether it was a question of modifying the price of gas to
customers or to corporate. They’ve (Ukrainian government) done
all these things to demonstrate their determination to endorse a
very bold program of reforms,” Lagarde stated.

The IMF money comes with stringent terms, asking for various cuts
and economic reforms. In the case of Ukraine, the requirements
include a 50 percent increase in the price of gas for households,
as well as a quick pension reform and lower government spending.

The World Bank warned on April 10 that the loan terms set by
the IMF would cut 2014 consumption in Ukraine by 8 percent, as
well as erode capital investment.

The increased cost of household gas and district heating
“will affect purchasing power and limit the government’s
ability to boost capital spending this year. Thus, in 2014, we
expect to see a decline in both consumption and fixed
investment,” the World Bank said in a statement.

Earlier in April, Ukraine’s finance minister, Oleksandr Shlapak,
said that paying
off debt to Russia would not be a top priority for Ukraine
when it secured its first tranche of International Monetary (IMF)
bailout cash.

Ukraine’s total debt to Russia, including the $2.2 billion bill
for gas, now stands at $16.6 billion, Prime Minister Dmitry
Medvedev said.

Back in December, before the Ukrainian protests turned into a
nationwide crisis, Russia’s President Vladimir Putin announced
that the Russian government would essentially buy $15 billion in Ukrainian debt by investing in
Ukrainian bonds, using money from Russia's National Welfare Fund.
The announcement came after a meeting with then-President Viktor
Yanukovich in Moscow.

The deal included a 33 percent discount for natural gas, which
could have save the country $7 billion in 2014. The agreement was
hailed by then-Prime Minister Azarov as saving Ukraine from
economic ruin.

Protests in Kiev began in November when Ukraine backed out of a
trade negotiation deal with the EU in favor of a debt deal with
Russia – a move interpreted by Ukrainians as a decisive step away
from integration with the EU.